Water meters can help consumers reduce consumption. Photograph: Graham Turner

Water meters are the most effective way to encourage sensible water use and should be installed in as many as 80% of British homes by 2020, according to an independent review published today.

The study, led by Anna Walker, chairman of the Office of the Rail Regulator and highly experienced in regulatory, environmental and social issues, looked at the current methods of charging for water and found them to be inadequate.

Water bills for around two-thirds of British homes are based on the rateable value (RV) of the property being served rather than the amount of water used, while 35% are on metered charging. The report said: "The RV system is out of date and does not target efficiently those who need help, nor does it provide customers with an incentive to save water."

The review team recommended that the future charging system should generally be based on the volume of water used, and therefore should be a metered system. The report said: "It is the charging approach most likely to encourage customers to use water efficiently and will best support the development of a sustainable water supply."

The report stopped short of recommending compulsory water meters across the UK, but did say that area-specific schemes could be brought in, and that if its recommendations were followed 80% of British homes could be on water meters by 2020.

While single occupiers are likely to save money with a water meter, large families could find that their bills grow, according to water regulator Ofwat.

The Environment Agency welcomed the review and said research had shown that water meters were effective in bringing down water usage, with metered households using between 10% and 15% less water than those without. According to the agency the UK is one of the few developed countries with a low level of water metering.

A spokesman said: "Widespread water metering implemented by water companies, including safeguards to protect vulnerable groups, would provide a fairer charging system and is vital to help reduce water consumption and avert future severe shortages.

"Water resources are already under pressure in many parts of England, with some 25 million people living in areas where there is less available water per person than Spain or Morocco."

Environment minister Huw Irranca-Davies said: "I welcome the publication of Anna Walker's excellent report. We will consider her recommendations carefully ahead of a full public consultation."

The report said that South West Water customers had paid 43% more for water bills than households in other areas since the company had committed to a larger investment in sewerage systems since it was privatised. In response to this, Irranca-Davies said: "We will ask Ofwat to consider the options for dealing with the high water bills which have resulted from the original privatisation, and to advise ministers accordingly."

According to the Environment Agency, the average Briton currently uses 148 litres (260 pints) a day, and the government has an aim to reduce this to 130 litres by 2030 in England.